The real estate tax policies introduced last year might have precipitated a mad rush of investors from the market – but in fact the procession towards the exit door has been surprisingly well mannered. The rumor mill continues to grind, however, and further measures cannot be ruled out suggesting further softening in the offing.
The cooling period has offered conditions of relative stability and low prices, allowing owner-occupiers the chance to buy in. Mortgage interest rates are up and speculative activity has been bopped on the head. The supply and demand balance has improved but, as a whole, residential prices have still increased.
Shanghai shows relative stability, which will come as a relief to the regulators. The average residential price has dipped from RMB7,054 (US$881) per square meter to RMB6,698 (US$837) per sqm between January and May 2006. This has brought the year-on-year rate of increase down from 15.1% to 4.9%.
The prospects for Shanghai are mixed. While recent evidence suggests a surge in interest, this may be little more than a backlog of wait-and-see buyers who have decided the time is now. Rental yields are not all that exciting and interest rates are up, suppressing most individual investor interest. This suggests further price falls once the spring buying season ends.
Beijing has been the main market to watch while Shanghai has stalled. At the end of 2005 the average residential property price reached RMB6,725 (US$840) per sqm, an increase of 19.2% on 2004. However, financing and resale complications must be resolved if Beijing real estate is to flourish in the future.
To ascertain the reasons behind these differing market performances, it is necessary to probe beyond the regulatory environment. Over the past two to three years, property investors – we might call them speculators – have accounted for 20% of the Shanghai market and their appetite for top-grade real estate and "stir-frying" drove up houses prices. In Beijing, meanwhile, the market has been dominated by owner occupiers out to make a pleasant home rather than a fast buck. Thus Beijing has behaved more reasonably.
As for those entering the market, anecdotal evidence suggests that during this period of consolidation it has been mostly upgraders and first time buyers. Analysis by age supports this and suggests the main groups of buyers are the under 30s and over 50s, with the latter group accounting for 71% of buyers with intent to purchase. By household income, buyers with annual incomes of RMB50-100,000 (US$6,245-12,490) make up 33% and RMB200-250,000 (US$25,000-31,230) account for 11%.
While the macro-controls apply to the whole of China, the impact has varied at the local level. There are also differences in types of purchasers and property supply, financing availability, costs and so on. One year on, it’s clear that the control and tax measures have seen some success in Shanghai. Effects in the rest of the country are mixed, but then the problems were not as great. But none of this will stem the flow of fresh rumors.